CHADIG AR H

DELHI PUBLIC SCHOoL,

MICRO EONOMiCS

PRODUCTION RETURNS TO AFACTORAND RETURNS TO SCALE

Production is defined as hared MA Shabram

collon, capital and labour 'transforimationaf inputs
result in the procuctlon into output,
For e.g. inputs df raw
goods but also services For of cloth. Production not only includes
exnmple services of a doctor, teacher, etc.
PRODUCTION FUNCTION
Production funclion is clefined as the
end outp:sts under given functlonal relatlonship between factpr inputs
relalionship tha giyes the technology.
In olier words it defined as
the
maximum oytput producible from various technological
inputs. i s adahns h1p mot a
economiCall in moiu combinations of,
Symbolically MA re donot (omidA
Q f(F, Fa, Fa,., Fo) vel
inpuLa and uuput.
Where Q is the
physical
f stands quantity of a produtt
(.e. output).
for.depends
F2, Fi,...F are the
upon (or function of):
various inpuls needed to produce a'.
Production funclion is always conside
shot run) and state of red with reference to
technology. particular time (long run
a

There are two types of production

(1) Short Run functions:
Production Function: When application of
(changed) while all others are kept fixed one factor is varied
the factors are used is-changed. The law (constant). In this the proportion in which
known as 'law of which oprerates in such a
returns to a situation is
(2) Long Run_ faclor
(changed) in ProduotlonFunction:
the same
proportion.
When application of all factors is varied
Tiie law
known as law f
reiums (o scale which operates in such siluation is

important Terms
Fixed Factors: are those faclors whose quantity canriat be
level of praduction. For e.g: land, machinery, changed with the change in
Jariable Factors: are those factors whose plant, equipment, factory building, etc.
level of quanlity can be changed with tlhe
production. For e.g. raw material, labour, power, fuel, etc. change in
Short Run /Short Period: refers to a lime
Some are period in which some factors are fixed and
variable. Production can be increased
factor only. In short ruin, level of production by increasing the amount of
variable
Lang Run Long Period: refers to a time changes.
Including fixed factors. The distinction betweenperiod
fixed
in which all
factors can þe changed
long ruin. In long run, scale of and varlable factors
praduction changes, disappears in the
Difference between slhort and
or a month
run long nun does not refer to a
calendar pernod say a year
or week. The
peniod is rather a functional concept and
lo
another. This distinotion merely depends vanes from one industiy
changed by producers in an industry. upon how quickly factor Inputs can be
For differences between shor run and long run, refer tdclass
notes.
 L A W

relers the
lo

Terms related to production:

Physical Product
(TPPL Total Returns:
during a g v e n perod
Product (TP/ Total firm with given
lnputs
produced by a
d i e output
of
of
of lime.
TP MP number of units of
variable factor.
APP xn , where n is the Product APPAverage Retdrns
(AP/Average Physical
4AVerage Product
of variable factror employea.
rerers t the per unit output
APP TPP
N
Product (MPP/ Marginalerus
(3 Product (MP/ MarginalPhysical
when an additional
unit of a
vaiable

he
addition to the total product
ffactor is employed.
MP TPn TPn.1 or
MPP ATPP
4L
Lawsof Retura
explains the clhange in output as a result of change in inputs

Lawof Returns to a Variable Faotoor Law of Returns to Scale

(Shord Run
Prmduction Function) (Long Run Productjon Function)
One factor Is
are fixed.
variable and.olher factors All fáctors are variable
.

Factor ralio changes. Faclor ratio remalns the same.

Law of Variable Pro;erfion/ Returns to a variable factor

LStatement: In the short run when more and more unils of a'vaiab! acior are added
the ixed factors, the total o
product inilially incre ases at an increa sinG rale (MP iricpeses}
her lotal
producl inereases al a diminishing rale (MP decreàses) and finally Stais
declining (iviF becomes negative).OR
The employment of other
Used in
inpuls remaining the same, as more of a particulr input is
production,
after a,
further employment of it.
certain level, its marginal 'physical product decroases with
The law there fore shows how Successive application of variable faclor to the fixed faclor
leads lo corresponding changesin outout. It outlines 3 important stages
Units of TPP APP
of
MPP
production.
Variable Factor Remarks

4 TAGE
10 MPe..s.-
18
24
28 STAGE
MPP
30
28 STAGETT

The hree pnoau u he law an

upho 3 uniu uvanus inbe,TP Tu ed in nao and MPrusu
m 4Lo&
3 to BuniG 6tuanab e
inp, a dimnih1r Aalo
TP
2 Fdsm
bw Renaina pouhie
and heall: ornGTo O

an& MP beCont nsahv 2

(
 LAW OF VAXJABLE PROPORTION IN TERMS OF TP AND MP CURVES.
"0(MPumaumu)
Mav

Kew doum ya

3+

stag
M P

Xau

Assumptions: unt anaslo in

Technology remains constant because if there is an improvement in the technique
of production, then increased output can be obtained with same
physical inputs.
There is a short period of operation
Only one factor is varied, others are constant
All units of variable factor are
i) In terms of TP
homogeneous.
As more and more units of
variable facior are.employed with fixed factor, total product initially
increasus ai an. increasing rate then
increases at decreasing rate and ultimately starts
decreasing.
On the TP curve in the
diagram,The first
increasing rate.,
phase is upto point A TP is increasing at an
If more than 3 units of variable factor are employed, total product still increases till 7units are
employed but this increase is at a
diminishing rate. The second phase starts from A and ends
at B.
If beyond7 units of variable
factor are employed then TP starts falling. The third phase starts
after B when TP curve starts falling.
These are the three respective
phases of the law.
(Note that TP is convex in phase 1; concave in phase 2, and downward sloping in phase 3)
(i) In terms of MP
As more and more units of variable factor are employed with fixed factor, marginal product
initially increases then falls but positive and
ultimately becomes negative.
In phase 1. MP increases upto C. Therefore, in phase I the MP curve
In is upward sloping;
Phase ll' MP falls after C but is positive upto D.That is MP is
the X-axis downward sloping but above
In Phase lll MP continues to fall but is
below the X-axis in phase lll. negative after D. Such that downward sloping but

C3D
Reason for three stages for Law of Variable Proportion:
Phase:MP rises because in the beginning as the quantity of the variable input is increased
itleads to
Full utilisation of underutilized resources
Division and specialisation of labour
Realisation of optimum/best combination of factors
Resuiting in efficient utilization of
leading to rise in MP of the variablefixed input and also raises efficiency of the variable"input
Pnase ll input
MP now falls but still positive because as the variable
pressure on fixed inputs because input is increased, there Is
Use of
of factors
beyond optimum combination
Lack of
perfect substitutability
between factors
eading to decline in efficiency of variable
Pnase: MP becomes
lll factors thus fall in
MP of variable input.
tO negative because the quantity of the
accommodate
negative.
the fixed input becomes too smal
contiFuously rising variable input. This makes MP of the variable
input
Relationshipis between TPPITP and
TPP the sum of
MPP are additions MPP's i.e. TPP.=MPP +MPP2 +
MPPIMP
to TPP i.e. .MPP
() When MPP MPP TPP- TPPn-1
(ii) When MPP increases, TPP increase at an increasing rate
(i) When MPP decreases
is
but positive, TPP
increase at
(iv) When MPP zero and maximum, TPP is constant dimnishing rate
OR negative, TPP falls
When MPP falls but þositive TPP falls
Relationship between APPIAP and
Both
fall.
AP and MP are MPPMP
inverse U-shaped curves, both rise reach
() When MP is maximum and then
(i) greater than AP, AP
When MP is
When MP
equal to AP, than AP rises
is constant
is less than and maximum
(iv) MP can be zero AP, AP falls (whether MP is rising or falling it doesn't
or
AP= TP
negative
but AP is always positive and never zero matter)
units of variable because
As TP cannot be factor
zero or
negative so AP can never be zero or
Maa negative.

MP
AP

AP
Q.Why MP curve cuts AP at its maximum MA
point??7
 In the following order: name, range, employment,
ach stage should be explalnad
trend, reasons.

returns/,law of diminishlng
Law of Variable proportion is
also called law ol diminishing . If
returns. It holds true in Stage and
ll
marginal
marginal product / law of diminishing marglnal product'7 law of dlminishing marginal
law of diminlshlng
asked In the exam
In terms of MPP with
the second.dlagram. . economists,
roturns then explaln it law by classical
as a separate
Returns w a s treated law of variable
Law of DIminishing
thls law indicates just one aspect of.
modern ecoiomlsts;
according to
proportlons.

Reasons behlnd operatlon of

law
other inputs are kept
Increases while
variable factor gradually pYoduction. Until
As employment'of
a more sultable, for
factor proportions: become
Inltialy Increases, After' a
unchanged, the factors is' attalned MPP
variable efflclenly, that
is factor
comblnatlon of fixed and glven inputs.less
optlmal variable factor can
work with
falls.
certain level the unsultable for
productlon arid MPP
become Increaslngly
that MPP and APP
c u r v e s will be inverse U
proportlons returns implies
dimiilshing
Thelaw.of
shaped.

Stage of Flrm's Operation of every addltlonal unjt of

I as employment
will nol operate, in Stage,
A ralional firm and more tptal oulput
(rislng TP and MP). factor is
variable factor is giving more
employment of every additional variable:
lll beéause costs (on account
of
It will not operate In Stage MP Is negative) and incresing
is falling,
giving falling output (TP of:prorits,
more variabie factor),
leading to low Jevel belng maxlmlzed (TP
hirling proflsare
will operate in Stage where
ll
Therefore, a rational firm
is Increaslng and MP
Is declinlng but stll positive). I' and lll are called
the phases of
of flm's operation. Stage
Stage ll Is called the siage
economlc absurdity/economíc nonsense.

returns are ionger in

is universally applcable.
Although stages of Increasing to diminishing
This law
ultimately all producing
units will be subject
Industries than in agriculture,
returns.

. *"**